MFNs: a competition law catch-22

Most of us have used some form of online, or digital, comparison tool (DCT) at some point – either for booking holidays, sorting out home or motor insurance, or switching energy provider. They are quick and easy to use, provide ‘at-a-glance’ price transparency and you may even be able to start a collection of branded soft toys. But are they as consumer friendly as everyone thinks? Competition authorities are intending to find out. And one particular concern they have highlighted relates to most-favoured-nation or MFN clauses. 

MFN clauses are agreements between the DCT and a retailer that (i) prevent the retailer from offering a better deal on another DCT (a wide MFN) and/or (ii) prevent the retailer from offering a better deal on its own website (a narrow MFN).  Usually the MFN will focus on restricting price, but it may go further and restrict non-price offerings. MFNs are often prevalent across a market (as DCTs may agree MFNs with most or all of its retailers). This results in a network of agreements that, taken together, effectively prevent retailers from providing a more competitive offering on alternative sales channels.

The CMA has already considered both wide and narrow MFNs as part of the Private Motor Insurance (PMI) market investigation. On 18 March 2015, the CMA issued an Order banning wide MFNs between DCTs and insurers. The CMA found that by restricting an insurers ability to set different prices on different sales channels, wide MFNs limited price competition and innovation, and could restrict entry into the market.  Narrow MFNs were, however, excluded from the Order.

In Germany, the Bundeskartellamt (BDK) went one step further, and in December 2015 banned both wide and narrow MFNs (or ‘best price’ clauses) following a case in the hotel booking market. The BDK found that narrow MFNs were equally as harmful as wide MFNs as they disincentivise lower prices overall and prevent new DCTs from entering the market. The BDK concluded that narrow MFNs offer “no apparent benefit for the consumer”. The CMA has since closed a parallel investigation into online travel agents following a European Competition Network (ECN) report on the monitoring of price practices in the online hotel booking sector. The CMA considered it too early to reach any conclusions on whether narrow MFNs give rise to competition concerns, but did not rule out taking action in the future.

The CMA’s update paper in the DCT market study (published March 2017) does appear to build on this view, and identifies both wide and narrow MFNs as practices which may raise competition concerns. The CMA found that both types of MFNs could restrict competition by “limiting suppliers’ ability to negotiate lower commissions in return for lower retail prices.”

So where is the catch? Well narrow MFNs, although clearly raising competition concerns in at least some markets, may also lead to efficiencies and prevent free-riding. If a DCT invests significant amounts of time and money in building and developing an innovative platform, is it then fair for the consumer to use that platform only as a shop window before buying the product from the retailer directly at a cheaper price? In the Final Report on the PMI investigation, the CMA stated that narrow MFNs “might be necessary” for the viability of the current DCT business model, and “might play a role” in reducing consumer search costs.  They were therefore excluded from the CMA’s Order prohibiting wide MFNs.

Last week, the European Commission (EC) published its Final Report on the e-commerce sector inquiry. The EC found that MFNs “can provide disincentives for retailers to compete” and concluded that this “may ultimately lead to a reduction of intra-brand competition”, meaning competition between different retailers to sell the same branded product. The EC also found that MFNs may reduce competition between DCTs and retailers, and make new entry for DCTs more difficult. However, at the same time, the EC acknowledged the necessity for DCTs to recoup their investments and the need to avoid free-riding. The EC concludes that MFNs should be analysed and assessed on a case-by-case basis.

Is this a satisfactory outcome? Not really, no. It is unquestionable that assessing MFNs is complicated. A careful balancing act is required to ensure that the interests of increased competition by retailers is weighed against the need to protect and encourage investment by DCTs. But suggesting a case-by-case analysis could also be read as simply putting MFNs in the ‘too difficult’ box.   MFNs have now been considered in various investigations by a number of competition authorities and a large cloud of uncertainly still hangs over the legality of these pricing practices. This is unsettling for retailers and DCTs alike, as businesses like nothing less than uncertainty. In some cases, this may be the result of MFNs being considered only as one small part of a much wider investigation. But this should change. 

The EC has requested that market participants provide more detailed information on MFN clauses, indicating that this is an area of further interest and potential scrutiny at a European level. The CMA has also made clear its intention to focus on wide and narrow MFN clauses as the DCT study moves into its final stage.  We can therefore hope that the CMA’s Final Report into the DCT market, and the additional work of the EC, brings some much needed clarity in this area.

Sarah Long is a partner at Euclid Law, a boutique competition law firm which provides highly specialised, bespoke and cost effective competition law advice to a wide variety of clients. Views are her own and do not constitute legal advice.  You can follow Sarah on twitter @sarahklong.